Question

Define or explain the following concepts:

1. Cross Elasticity of Demand

2. Unitary Elastic Demand

3. Income Elasticity of Demand

4. Elastic Demand

Answer 1

1) Cross elasticity of demand is the measure of the responsiveness of demand for a good to a change in the price of a related good.
$Ec=\frac{\mathrm{Proportionate}\mathrm{change}\mathrm{in}\mathrm{quantity}\mathrm{demanded}\mathrm{of}\mathrm{Good}X}{\mathrm{Proportionate}\mathrm{change}\mathrm{in}\mathrm{price}\mathrm{of}\mathrm{Good}Y}$

2) Unitary elastic demand implies that a change in the price of a commodity leads to a proportionate change in the quantity demanded of that commodity. For instance, if the demand for Good X is unitary elastic, a 50% increase in the price of Good X will lead to a 50% decline in the quantity demanded of Good X. In this case, E_d = 1.

3) Income elasticity of demand measures the responsiveness of quantity demanded with respect to a change in the income of the consumer, while other factors including price of the commodity remain unchanged.

$Em=\frac{\mathrm{Proportionate}\mathrm{change}\mathrm{in}\mathrm{quantity}\mathrm{demanded}\mathrm{of}\mathrm{Good}X}{\mathrm{Proportionate}\mathrm{change}\mathrm{in}\mathrm{income}\mathrm{of}\mathrm{the}\mathrm{consumer}}$

4) Elastic demand for a good implies that the demand for a good is highly responsive to its price. In this case, the percentage change in demand is greater than the percentage change in price and |E_d| > 1. This implies that a little change in price will lead to a significant change in quantity demanded.